How to Cure Corporate America’s Selfishness

Senator Elizabeth Warren has a simple idea for keeping big business accountable to the American public, not just shareholders.

August 15, 2018

Corporations have always been “creatures of the State,” as Teddy Roosevelt once called them. But they have become a kind of Frankenstein’s monster, unmoored from their creators to wreak havoc on the countryside. Corporations no longer consider the broad public interest in making decisions, nor do they worry that the state will ever revoke their license to operate. They only consider the desires of their shareholders, which has led to record corporate profits, stagnant wages, soaring inequality, and a shrinking middle class.

On Wednesday, Senator Elizabeth Warren proposed a counterweight to this relatively recent phenomenon in American business. Her bill, the Accountable Capitalism Act, revolves around a simple idea: The government would grant corporations the right to exist through a public charter, and could use that power to put obligations on corporations to benefit the broader public rather than a small handful of shareholders.

A federal corporate charter, required for all companies with over $1 billion in annual revenue, would be granted through a new Office of United States Corporations in the Commerce Department. The charter could be revoked if corporations didn’t follow its rules, including engaging in “repeated and egregious illegal conduct.” Shareholders could also sue companies for charter violations. “For the past 30 years we have put the American stamp of approval on giant corporations, even as they have ignored the interests of all but a tiny slice of Americans,” Warren wrote in a Wall Street Journal op-ed announcing the bill. “We should insist on a new deal.”

I’ve argued previously that the corporate charter can be a powerful tool against recidivist corporate lawbreakers who continually harm the public. But charters are primarily conferred at the state level, and states haven’t really enforced them, worried about losing corporate tax revenue. A federal charter short-circuits that fear, and establishes a set of common, enforceable standards of corporate conduct.

Under the federal charter, companies would be required to consider the interests of workers, customers, communities, and society before making major decisions. Employees would elect at least 40 percent of all company directors, giving them representation on corporate boards. That would involve worker representatives in decisions like whether to engage in political spending, which would require sign-off from 75 percent of all directors and shareholders. Finally, executives who receive shares of stock as compensation would have to hold them for at least five years.

Warren is using a variety of strategies to attack shareholder value theory, the way capitalism has been practiced in America since the 1980s. Free market evangelist Milton Friedman created this theory, eliminating what had been a much broader conception of corporate social responsibility. According to Friedman, companies have a duty to act in the sole interests of their shareholders. And shareholders have the overriding goal of increasing the value of their investment.

As the late Cornell professor Lynn Stout explained in her book The Shareholder Value Myth, Friedman’s concept rested on the legal error that only shareholders are stakeholders in a company. But it gradually became the standard in business, and the source of all kinds of perversions of capitalism.

Keeping down worker wages, busting unions, and outsourcing jobs to low-wage countries are all seen as beneficial because a higher percentage of profits goes to the firm. Stock buybacks and other financial engineering have funneled those profits out through the capital markets; as Warren notes, “between 2007 and 2016, large American companies dedicated 93 percent of their earnings to shareholders.” Because over 80 percent of all stock is held by 10 percent of the population, inequality has soared. Passive income, which confers a lower tax rate, requires only having money to make money. Most CEO compensation comes in the form of stock, creating powerful incentives to goose the stock price. Corporations spend heavily to influence government to change laws and soften regulations that reduce potential profits, out of an obligation to shareholders.

In short, if corporations are people, shareholder value theory requires them to operate like psychopaths, pursuing only cash and bulldozing any obstacle in their path. A sense of ethics or responsibility to other citizens is disallowed in this framework.

Warren’s agenda would break the tyranny of shareholder value. Giving companies a duty to other stakeholders would force them to consider more than maximizing stock returns. Worker representatives on corporate boards would make the decision-making process far more democratic. Throwing sand in the gears of financial engineering—in addition to the five-year hold on executive stock sales, there would be a three-year lag after any buyback—would discourage both the leaking out of corporate profits to investors and the payment of executive compensation in stock.

There’s proven evidence that this model of corporate governance can work. “Co-determination,” the term for worker representation on corporate boards, has created a form of capitalism in Germany where workers are far more equitably compensated and decisions are made with an eye toward long-term goals.

But you don’t have to look overseas. America in the 1950s and 1960s followed a model where executives and directors had a broader view of corporate responsibility. Because of structural racism and sexism, not everyone shared in its benefits. But combining a more egalitarian society with a more egalitarian corporate governance would reduce the dissonance between a more socially equal society and a more economically divided one.

“Corporate responsibility” used to be common practice, and now it’s more of a PR campaign. The Warren agenda would make it a legal standard, in a way that she believes would redistribute trillions of dollars from corporate coffers to business investment and, ultimately, the employees that created the riches. She has taken to heart Roosevelt’s words about corporations—that “the State not only has the right to control them, but is duty bound to control them wherever the need for such control is shown.” The lived experience of shareholder capitalism shows the need is greater than ever.